Venmo takes losses after payments fraud

PeterRudegeair

Venmo was hit by a wave of payments fraud earlier this year that helped push losses higher than the company previously expected and prompted it to shut down some user features to control the damage.

In the first three months of 2018, the digital money-transfer service owned by PayPal Holdings Inc. recorded an operating loss of about $40 million -- nearly 40% larger than the loss for which the company had budgeted, according to internal documents reviewed by The Wall Street Journal.

Expenses related to fraudulent transactions were a big factor. The so-called transaction loss rate, which includes losses related to fraudulent charges, rose from about 0.25% of overall Venmo volume in January to 0.40% in March. The company had been shooting for a rate of roughly 0.24% in those periods, according to the documents.

"Fraud levels are on the rise across the board," Venmo executives wrote in an internal presentation from March that was reviewed by the Journal.

Venmo's fraud difficulties, which haven't been previously reported, illustrate how innovations designed to make it easier for consumers to send money have also emboldened scammers to exploit their weaknesses. Banks and financial-technology companies alike have been grappling with how to fend off fraudsters as customers move toward digital payments.

The spike in fraud caught Venmo by surprise, and its responses gummed up the service for many genuine users, according to the documents and people familiar with the matter. Additionally, losses were big enough that executives worried they would push PayPal to miss first-quarter earnings estimates, according to emails reviewed by the Journal.

"This would have a major impact on our stock, brand, and position in the market," wrote Benjamin Mills, Venmo's top product executive, in an email to employees on March 22. "We cannot let that happen."

Venmo introduced new features in the first quarter, a PayPal spokeswoman said, adding that short periods of higher losses typically accompany such rollouts. She said that Venmo's loss levels for the entire first quarter were less than 0.35% and have declined since then. "Venmo loss levels are lower than the overall average for PayPal and compare favorably to the industry," she said. Ultimately, PayPal's per-share earnings beat analysts' estimates for the first quarter.

To deal with the losses, Venmo stopped allowing customers to transfer funds instantly to their bank accounts and blacklisted tens of thousands of users deemed suspicious by algorithms. It also stopped letting customers send and receive money through its website (though most customers use Venmo on their mobile phones).

"I'm pissed that it's come to this and that we have to hurt our customers to try and get our loss numbers under control," Mr. Mills wrote in the March 22 email.

Fraud can take different forms on Venmo. Criminals can load stolen credit cards onto new Venmo profiles and send money to accomplices. Hackers can take over accounts of existing Venmo users and pilfer their money. The company generally reimburses users who lose money in such transactions. It isn't clear what caused the first quarter's increase in fraudulent activity, or whether any culprits have been identified.

Since it became part of PayPal in a 2013 acquisition, Venmo has been a financial drain. In addition to fraud losses and personnel expenses, Venmo bears the cost of most money transfers through its network since it doesn't charge fees to most users. Those costs have risen alongside Venmo's payments volume, which expanded from $1.3 billion in the first three months of 2015 to $12.3 billion in the same period this year.

Venmo recently introduced new services aimed at generating more revenue. Users can now pay a fee to take their money out of Venmo instantly and use Venmo to pay at Uber Technologies Inc., Grubhub Inc. and roughly two million other online retailers. In June, PayPal announced it would start issuing plastic Venmo debit cards allowing users to draw on their funds at bricks-and-mortar retailers.

Some of those initiatives, including instant transfers, were paused during Venmo's fraud-fighting response. Others have had slow starts. For instance, payment volume related to commercial transactions was just $16 million in the first quarter, about half of what Venmo had expected in its budget, according to an internal presentation.

Venmo has since restored users' ability to transfer funds instantly. The company said last month that Venmo processed more than $1 billion in instant-transfer volume in September, the first time it disclosed that number. It also said that nearly one in four Venmo users completed a transaction that generates revenue.

But executives ultimately decided keeping money-transfer features on Venmo's website wasn't worth the fraud risks. One Venmo executive said in a May email to staffers that the website accounted for about 2% of overall volume but about 15% of total net losses.

Venmo began informing users about that change in May and June. At the time, the company said it wanted to focus on the mobile app since that was where most user activity took place.

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